The Canadian equity market has come under pressure in recent trading sessions as persistent inflation fuels expectations of further interest rate hikes. The benchmark S&P/TSX Composite Index has retreated about 3.5% from its recent highs, while several individual stocks have fallen even more sharply. MDA Space (TSX: MDA) is one such example, with its shares falling more than 43% from their May peak. Concerns over the company’s elevated cash outflows appear to have weighed on investor sentiment, creating uncertainty around its near-term financial performance.
However, the sharp correction also raises the question of whether the stock now offers an attractive entry point for long-term investors. Let’s examine MDA Space’s latest quarterly results, growth opportunities, and valuation to assess its investment potential.
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MDA Space’s operations and second-quarter performance
MDA Space is a leading Canadian space technology company specializing in geointelligence, robotics, space operations, and satellite systems. In August, the company reported a strong second-quarter performance, with revenue increasing 33.6% year over year to $498.6 million. Satellite Systems, Robotics & Space Operations, and Geointelligence posted revenue growth of 44.5%, 13.1%, and 19.5%, respectively, reflecting higher sales volumes across all three business segments.
Gross profit rose 32.8%, but gross margin narrowed 10 basis points to 25.3%. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) climbed 26.2% to $96.3 million. However, the adjusted EBITDA margin contracted by 110 basis points to 19.3%, in line with management’s guidance, as higher selling, general, and administrative (SG&A) and research and development (R&D) expenses weighed on profitability.
Adjusted net income rose 12.9% year over year to $51.8 million. Nevertheless, adjusted earnings per share (EPS) fell 1.5% to $0.36, mainly because the average share count rose after the company’s U.S. initial public offering in March.
Cash flow, however, presented a challenge during the quarter. MDA Space used $93.4 million in operating cash, compared with $52.8 million generated a year earlier. Free cash flow also swung to a $150.2 million deficit from positive $16.2 million in the prior-year quarter. Consequently, cash and cash equivalents fell to $389.7 million from $665.9 million a year earlier. Despite this decline, the company’s approximately $1.1 billion in available liquidity provides financial flexibility to support its ongoing operations and growth initiatives.
With its revenue expanding across business segments but cash flow remaining an area to monitor, let’s examine MDA Space’s growth prospects.
MDA Space’s growth prospects
Rising demand for satellite connectivity and space-based robotics, higher defence spending amid geopolitical uncertainty, and increasing investment in space exploration are creating compelling long-term growth opportunities for MDA Space. To capitalize on these trends, the company is expanding its manufacturing capacity and pursuing strategic acquisitions. In May, it inaugurated a high-volume satellite manufacturing facility in Montréal, strengthening its ability to meet growing demand. Meanwhile, its proposed acquisitions of Blue Canyon Technologies and Collecte Localisation Satellites could broaden its technological capabilities, expand its international presence, and significantly increase its addressable market, subject to successful completion.
MDA Space’s growth outlook is further supported by a project pipeline valued at approximately $40 billion and a $4 billion backlog at the end of the second quarter. While the project pipeline highlights potential future business opportunities, the existing backlog provides greater visibility into near-term revenue prospects. As it expands its operations, the company focuses on improving profitability and strengthening cash flow generation. If it executes these initiatives effectively, MDA Space could capitalize on rising demand across the space industry and deliver sustained long-term growth.
Investors’ takeaway
Despite the recent selloff, MDA Space remains up more than 45% year to date, outperforming the broader equity market. The recent pullback has also brought its valuation to more attractive levels, with forward price-to-sales and price-to-earnings multiples of 2.6 and 26.5, respectively. Supported by a substantial project pipeline, expanding opportunities across the space industry, and initiatives to strengthen profitability and cash flow generation, MDA Space could offer compelling long-term growth potential. However, given its execution risks and recent cash flow pressures, the stock may suit investors with a higher risk tolerance and a long investment horizon.
